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From Kirsten Bischoff, Opalesque New York:

While ways to verify the much discussed “green shoots” are debated, one indicator may be the performance of small caps, which Chuck Royce CIO and Portfolio manager at Legg Mason recently said “should lead in the early phase of a prolonged recovery in stocks…”

In fact, while small caps leading recovery may be a historic rule of thumb, the Midwood team led by portfolio managers David Cohen and Ross DeMont has seen few industries where meaningful signs of economic recovery are evident. In its frequent discussions with public companies the team has been hearing comments such as, “Things are somewhat less bad,” or “We think we are near the bottom”.

This marks a positive change of tone from the darkest days of the first quarter but, “A deceleration of industry declines is not a recovery” the managers note.

Other fund managers who are more pessimistic about “green shoots” have attributed the easing of decline rates in 2Q09 to the inventory cycle rather than to any uptick in economic activity. Midwood might be slightly more optimistic as they see easing of tight credit conditions as a reason some firms will experience improvements in the second quarter. Businesses paralyzed by the lack of credit during 4Q08 and 1Q09 are finding that some customers are finally able to finance purchases.

One example Midwood cites is medical laser companies that should experience 2......................

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